REIA and DePaul’s Real Estate Center recently held their 18th annual Fall Summit, Thriving in a Dynamic Real Estate Environment.
This year’s event featured an opening presentation by Tom Errath, Managing Director Research & Strategy, Harrison Street Real Estate Capital. That segment was followed by a panel discussion moderated by Rick Sinkuler, Douglas & Cynthia Crocker Endowed Senior Managing Director, the Real Estate Center. The panelists included Errath; Robb Bollhoffer, Managing Principal, 29th Street Capital; Dan Hayes, Senior Director, New York Life Real Estate; and Jerry Lumpkins, First VP & CRE Lead, Valley National Bank
Following are highlights and key takeaways from the program:
Errath Opening
- What a difference a year makes providing an interesting juxtaposition of key market driving forces such as geopolitical upheaval, the conflict in Ukraine and the capital markets’ volatility against the reality that real estate fundamentals, in general, “have never been stronger.”
- Addressing inflation and specifically the housing element of the Consumer Price Index (CPI), Errath said that the Fed does not have a lot of control over housing costs which represent 30% of the inflation calculation. “Increased interest rates have stymied people who have put buying a house on hold until things get figured out.”
- In fact, Errath noted an inverse relationship where higher interest rates—designed to cool inflation (and to a certain extent rent growth)—are creating upward pressure on inflation.
- A number of factors are contributing to slower capital markets activity, including the likelihood that some of the big lenders (and banks) have met their real estate allocations for the year. Further, with the volatility in the financial markets, targeted investment portfolios may need to be rebalanced.
- Institutional investors are increasingly focused on ESG. “You need an in place strategy that covers more than just wind and solar to even qualify to participate in the RFP process.”
The Panel Discussion: On the Prospects of a Recession
Tom Errath said the possibilities of a recession are more and more realistic, but not likely until 2023. He added that inflation is “sticky and wide”, and the Fed can hit the same nail over and over, but it won’t necessarily fix all of the elements that contribute to inflation. Still, Errath isn’t expecting a long recession.
Dan Hayes said, “Psychologically it feels like a recession. Yet while we have fulfilled the technical definition of a recession, there are components like employment that aren’t in a recessionary mode.”
Robb Bollhoffer added, “Everything is decelerating. It’s important to try and stay ahead of the curve.”
Jerry Lumpkins agreed, saying technically we are in a recession. Among the byproducts of the state of the market is that if deals are re-traded, higher levels of equity are being required of the sponsor. He noted that he is still seeing lending activity in the industrial and multifamily sectors, but any others “require a long hard look.”
Client Conversations
Rob Bollhoffer said his firm constantly addresses the fact that “having the right equity is critical.” His firm, which emphasizes retail investor equity believe that this segment still has six months to “go all in” before institutions take over as the dominant investors.
Dan Hayes advises clients and investors about being selective and having a critical eye, explaining that even though US real estate is seen as a safe haven for investing, there are lots of question marks, including more increasingly whether industrial real estate will remain a darling.
Errath said that Harrison Street continues to discuss its strategy to “invest in cash flowing, defensive assets.” He reinforced that no matter what’s going on in the world, geopolitically or economically, “people still need housing.”
Interest Rates
Lumpkins expects another potentially significant rate hike—75 to 100 basis points—before the end of the year. Errath thinks there will be two more hikes.
The Hybrid Workplace
“There is a real tug and pull going on in the workplace,” Sinkuler said. “Businesses are making significant investments in reconfiguring workspaces. But the impact on getting people back to the office hasn’t been as successful as planned.”
Hayes and Lumpkins agreed that the hybrid work environment is here to stay, with Hayes adding, “it’s a secular change.”
Lumpkins noted that “flexibility is critically important to the young workforce.” Yet he added that all that flexibility makes office assets a tough product from a lending standpoint.”
While not discounting the growth and popularity of the hybrid office environment, Bollhoffer took a different stance. “Young people should want to be in the office,” he added, explaining that he considers culture and hands-on, in-person participation critical.
Especially when it comes to young people, but also for more seasoned professionals, Errath suggests, “If you want a job, work from home; if you want a career, come to the office.”
Sinkuler summarized the discussion and concluded by saying, “Availability is the new capability.”
In summing up what was a positive and upbeat conversation, Errath offered a cautionary perspective and said, “We’re on a tight rope right now. We don’t need a geopolitical event or major supply chain issue; or other market forces that could hit the market” and have a negative impact.
